Coal:Terminal?

by Michael Hurwicz

A massive coal shipping terminal – the largest in the U.S. – is being proposed for Cherry Point, near the city of Bellingham, the economic hub of Whatcom County in Washington State. The Gateway Pacific Terminal (GPT) could ultimately ship up to 48 million tons of coal a year across the Pacific to China and India.

It's an idea that has some residents cheering, and some up in arms about a wide variety of health, safety and environmental risks. Heated discussion of these risks will no doubt continue.

At the same time, there are risks that, because they are not quite so dramatic and emotional, may not be receiving the attention they deserve. These risks are purely economic. The possibility that a coal terminal might not be the best and highest economic use of Cherry Point may not be as hair-raising as the vision of a major oil spill in the Puget Sound, or even as disturbing as the prospect of a mile-long coal train rolling through the heart of Bellingham every hour, past homes, schools, playgrounds, restaurants and businesses. But, economic risks do speak directly to the whole argument for permitting the coal terminal in the first place: to create jobs, generate taxes and benefit the economy of Bellingham, of Whatcom County, of the State of Washington, and ultimately of the entire United States. To the extent that these promised economic benefits cannot be assured, the whole Cherry Point coal terminal project has to be called into question.

So, I would like to ask you to spend a few minutes with me thinking about these not-so-sexy, not-so-dramatic, but critically relevant economic risks. At the same time, I want to take fully into account the possible benefits of the coal terminal, and not dismiss those just because there are also risks.

So, what are these economic risks?

• One risk is that other local businesses can be hurt.
  
  
• Another is that better opportunities may be lost because they're incompatible with the coal terminal.
  
  
• The costs of preventing or fixing problems, particularly health and safety issues associated with coal trains, could be significant.
  
  
• And finally, in the long run, placing a large bet on coal, and coal alone, could turn out to be not the wisest thing to have done from a financial perspective.

But first, let's look at the possible benefits of the terminal.

Benefits

SSA Marine, the company that is proposing to build and operate the coal terminal, funded two studies of the likely economic benefits. Both studies looked at two phases: 1) construction and 2) ongoing operation. The construction phase would create a lot more jobs, but those jobs wouldn't last. The ongoing operation phase would create fewer jobs, but they would be steady jobs that could last many years, jobs you could raise a family on. And in both phases there is both direct economic benefit – that is, the wages that are paid to people working at the terminal – and indirect benefit, when those people go out and spend those wages in the community, and support stores and restaurants and automobile dealers and so on.

The first study, by Martin Associates, estimated that in the second phase, the operation phase, the terminal would create 294 permanent jobs. But the economic activity generated by those people would actually create 569 additional jobs in the community.

The second study, by Finance & Resource Management Consultants (FRMC), used Martin's estimate of 294 direct jobs, and estimated that 576 jobs would be created in the community – pretty close to Martin's 569 jobs.

There was a little more disagreement between Martin and FMRC on how much the construction phase would generate, with FMRC's numbers being 30-40 percent lower than Martin's. In addition, there's some uncertainty about how long the construction would take, so it could generate more jobs for a shorter time, or fewer jobs over a longer period of time. But, taking all that into account, and assuming it takes two years to build the terminal, SSA estimates that the construction phase would produce 1,700 direct jobs and 1,900 indirect jobs for a period of two years. After that, things would settle down to the 294 permanent jobs. It's also quite possible that there would be a second round of construction, if the demand for coal justified it, and that second round would create 400 direct jobs and 440 indirect jobs for one year, or perhaps the same number of working hours stretched out over a longer period of time.

To give you an idea of when all this might happen, construction could be during 2016 and 2017, and then the permanent jobs would start in 2018. The reason for the delay in starting is that the environmental studies that need to be done will take at least two years, and possibly up to four years, to complete. And construction can't begin until the Environmental Impact Statement is completed and the construction approved based on that statement.

So, those are the benefits. It's a lot of jobs. A lot of jobs.

Risks

Counterbalancing that, one risk is that other local businesses could be hurt, primarily by the additional five loaded trains that will have to travel through Bellingham every day. These trains will be 7,000 feet long: 1.3 miles. Eventually, 1.6 mile-long trains could be used. Local businesses are concerned about the effects this could have, such as noise, coal dust, and delayed traffic. A mile-long train running next to a restaurant, shop or bar, they fear, would not be attractive to customers. For the same reason, more train traffic could decrease the value of homes, particularly near the tracks, but also farther away, because trains are required to blow their horns at crossings. Currently, there are 16 at-grade crossings in Bellingham: crossings where there is no overpass or underpass for vehicular traffic. Each train has to blow its horn for each of those crossings..

It's possible that quiet zones could be created, which would reduce the need for horn blowing, but that would require gates and signage and maintenance, with costs in the millions. It's not clear who, if anyone, would actually undertake those costs. If no one does, then the communities along the rail line would bear any economic losses.

There are other things that can be done to reduce the impact of the rail lines through Bellingham, things like overpasses and changes in the street grid. But these things don't come cheap, either, and again it's not clear who would bear the costs. If the taxpayers bear them, that cost has to be subtracted from any net benefit resulting from the coal terminal.

Another risk is that better opportunities could be lost because of the coal terminal. Although Whatcom County hasn't been immune to the financial downturn affecting the whole country, overall it has been a relatively bright spot for Washington State. From 2001 to 2010, Whatcom County added 8,100 non-farm jobs: an 11.6 percent increase, compared with the statewide average of 3.0 percent.

Those are county-wide figures, but 60 percent of the jobs in the County are in Bellingham, and Bellingham businesses generate more than three-quarters of all retail sales and more than half of all the revenue from hotels, motels and food services.

So, there's something that's working well here, something that's attracting new jobs, new businesses, new residents. Some of this growth is related to tourism. Some results from a steady influx of entrepreneurs and skilled workers. Among other things, tourists, entrepreneurs and workers have all been attracted to Bellingham's reputation as a "clean, green" city, dedicated to sustainability. To the extent that hosting the largest coal terminal in the U.S. could damage that reputation, it could also put a damper on growth.

In November 2011, a local citizens group, CommunityWise Bellingham (CBW) paid for an independent review of the potential economic impacts of the Gateway Pacific Terminal. This review was conducted by Public Financial Management, the nation’s leading provider of independent government financial advisory services.

One of the things that they looked at was the possible effect on a major waterfront redevelopment project that has been in the works for years. Currently, the Port of Bellingham’s plan calls for:

• Redevelopment of 6 million square feet of office and commercial space
• 1,892 units of housing
• 3,614 residents on site
• Up to 460 slips for boats
• 33 acres of public parks and open space

At full build-out (which could take 25 to 30 years), the Port of Bellingham estimates the project could attract more than $1 billion in public and private development – the public development being primarily Western Washington University. In terms of jobs, the project could create 7,200 permanent full-time jobs. That's around 25 times as many direct jobs as are projected for the coal terminal.

A first step in this redevelopment, a project called the Army Street Project, is in the advanced planning stages. This project alone could represent around $350 million in investments, with $120 million coming from the public sector and $230 million from the private sector. Construction on that could begin in 2015 or 2016.

The coal terminal and the waterfront redevelopment are not mutually exclusive. They can both go forward and potentially be successful.

However, the Bellingham Public Development Authority (PDA) emphasizes that an "attractive, safe and convenient access way" between downtown Bellingham and the waterfront is key to realizing the economic benefits of the project. Both street traffic and railroad traffic tend to compromise that access, and the more traffic there is, the more it would hurt businesses and other activities in the redevelopment area. The prospect of reduced returns on investment could discourage developers or investors. Even the possibility of a massive coal terminal increasing rail traffic and limiting access to the waterfront could have a depressing effect on the whole redevelopment project.

If the coal terminal reduced the number of jobs in the redevelopment area by five percent, it would eliminate 360 permanent jobs over the next 25 to 30 years. In that case, the coal terminal would actually be a net loss in terms of permanent jobs.

Another possible negative impact of the coal terminal is on tourism. According to a recent report commissioned by Bellingham Whatcom County Tourism (the county’s official tourism agency), spending by visitors to the County has increased each year since 2000, reaching $460 million in 2008. Visitors say they come primarily to appreciate the physical environment. This includes the ambiance of downtown Bellingham and nearby Fairhaven, natural attractions and the environment, as well as the waterfront, outdoor recreation, parks, scenic areas, and recreational trails.

These same "quality of life" attributes may explain why high-earning and highly educated individuals continue to move to Whatcom County and Bellingham. For instance, between 2004 and 2010, adjusted gross income (AGI) in the county went up $172.3 million, because more high-earners moved in than moved away. Anything that negatively impacts – or is perceived as negatively impacting – quality of life could reverse this positive economic trend.

As a CommunityWise Bellingham report notes: "The risk exists, in part, because the principal freight to be transported to GPT is coal. To the extent that the perception of Bellingham and Whatcom County as ‘clean and green’ wanes, it could put potential gains in tourism and in-migration of skilled workers and entrepreneurs at risk."

The report also quantifies the risk in the following way: "To the extent that development and operation of GPT would reduce baseline employment gains by less than 17 percent (between 2012 and 2021) or less than 13 percent (between 2015 and 2024), it would produce net gains in employment for Whatcom County. If, however, based on the scenarios outlined above – or for other reasons – development and operation of Phase I of GPT would result in the loss of more than 17 percent (between 2012 and 2021) or more than 13 percent (between 2015 and 2024) of baseline growth, it would have a net negative impact on the Whatcom County economy."

This risk analysis looks at approximately the next ten years. What about beyond that, say, the next 20 years?

The Gillette coal field of the Powder River Basin of Wyoming is the source of the coal that would be coming to Cherry Point. According to the most recent United States Geological Survey (USGS) assessment, only six percent of that coal could be mined profitably under the economic conditions obtaining at the time of the report (2008).  Between 2002 and 2008, despite the fact that the price of coal was escalating dramatically, the USGS estimate of coal that could be profitably mined in the Gillette coal field of the Powder River Basin fell from 23 billion tons to 10.1 billion tons. The 2008 USGS report estimated that the 10.1 billion tons of economically accessible coal would last about 22 years, if production remained at 2008 levels. That would mean that the major mines in the Powder River Basin would, for practical purposes, play out by the year 2030. (Similar predictions were made for other areas of the U.S.)

This poses a risk to any investment in a single-purpose facility dedicated to coal, which could not be easily or quickly converted to other profitable activities. A multi-purpose facility at Cherry Point might turn out to be a safer investment, taking into account the uncertain future of coal.

Conclusion

A coal terminal at Cherry Point offers significant potential economic benefits. It also presents significant risks, which could overwhelm those benefits. Both in the immediate future and In the longer run, it is possible that other uses of Cherry Point would provide more economic return on investment than a single-use coal terminal.